Thursday, March 17, 2011

This week our B&N bankruptcy index is showing bankruptcy is becoming a clear and present danger for Barnes & Noble. Just a short reminder - As Borders filed for bankruptcy, we look at Barnes & Noble, the nation's largest book chain to see if they will follow Borders and also go into bankruptcy and if so, when exactly.

To do it more analytically we launched few weeks ago a new B&N Bankruptcy Index, which is based on 10 parameters, which receive a grade between 1-10 (1 - worst grade, 10 - best grade). Hence we receive a 0-100 point index scale, which we divide into several ranges as follows:

90-100: B&N is in an excellent shape. Couldn't be better!80-89: B&N is doing great. Bankruptcy is no longer a real threat.70-79: B&N could do better and has to be cautious of bankruptcy.60-69: B&N doesn't look too good and bankruptcy is becoming a more realistic threat.50-59: Bankruptcy is a clear and present danger. 49 and less: Red alert! Bankruptcy is just around the corner and is likely to happen within a short time frame.

We will check the B&N Bankruptcy Index every Thursday, updating each one of the parameters included in the index and will analyze the trend. You can follow the weekly changes in the index from the day it was launched on the Barnes and Noble Bankruptcy Index page on our website.

So here's our update for this week (in brackets is last week's grade):1. Confidence of the stock market in B&NThis parameter will look at the performance of the B&N stock (symbol: BKS) in the last week. The performance of B&N's stock is an indication of the confidence the market has in the ability of B&N to maintain a viable business.

So let's look at last week's figures:

3/9: $11.813/16: $9.71Change: -17.8%

As you can see, B&N's stock continued to fall down last week with a decrease of 17.8% in the stock's price. Just for comparison, the S&P500 Index fell during this period in 4.8% and Amazon fell in 2.6%. If you follow the stock or our index (or both) you know that this trend of double digit falling is going for 3 weeks. In total the stock went down in 47% in the past three weeks to its lowest point since the early 1990s, as Martin Peers reports on WSJ.com.

Investors have reason to be concerned about Barnes & Noble's long-term future. The company faces the same long-term industry challenges that drove Borders into Chapter 11. To think that Barnes & Noble is in great shape simply because Borders is contracting is foolish. The Internet and electronic books are putting tremendous pressure on physical book stores, and Barnes & Noble is no exception.

2. What analysts say on B&N Martin Peers reminds us on WSJ.com some of B&N's strengths, although he doesn't forget to mention it doesn't seem to convince the investors right now:

Admittedly, Barnes & Noble has more chance of surviving. It has established a foothold in digital-media distribution by developing its own e-reading device, the Nook, to compete with Amazon's Kindle and Apple's iPad. Company executives say they have already captured 25% of the ebook market, more than the company claims to have in physical books...The next chapter of Barnes & Noble's story is only just beginning. But investors may want to stop reading here.

But Barnes & Noble's main source of revenue is still physical books. The chain is still inferior to Amazon.com's convenience and pricing power, Walmart's girth and Apple's technology prowess.

Greg Sushinsky summarizes: Barnes & Noble needs to adapt a similar model around diversifying into digital publishing. It needs to build up its digital stake substantially, find alliances and develop ancillary businesses so it won't be dependent on its physical stores. This is easier said than done, but Barnes & Noble's survival will depend on making this happen.

So – for me personally – I don’t care what the price of the stock is. That’s not the signal to buy. The only signal to buy would be a complete change in strategy or management. And by management, I mean Riggio, so there’s no way that’s happening.

Whether other folks should buy or sell Barnes & Noble stock – I can’t say. I can only tell you that I would never be comfortable holding the stock with the current management and current strategy they are pursuing. It’s suicidal. Right now, they’re intent on death by Nook. And I’d rather not join them.

No other comments or analysis were found. Due to the relatively negative sentiment this week, this week's grade is going down by half a point: 6.5 (7)

Even so, there are plenty of uncertainties. What will happen to Barnes & Noble's bottom line as the book market shifts to digital? Its gross margin will likely decline. The company has said it makes 20%-plus on ebooks, against 30% for physical books sold in stores and 27% gross margins for those sold online. Of course, it will more than make up for that with operating savings: The costs of running its brick-and-mortar stores are much higher than expenses on the ebook side.

Still, Barnes & Noble will only get the full benefit of those operating savings if it closes stores entirely as foot traffic drops. So far, Barnes & Noble has held off on aggressive store closures, hoping to pick up business as rivals close. It is devoting shelf space to toys and games, although there are competitors in those areas. The worry is the company will be too slow to close outlets.

Bottom line: Just like Borders, B&N still doesn't have yet a clear and comprehensive strategy that will transform their brick and mortar stores from a liability back to an asset. This week's grade stays the same: 4 (4)

4. What B&N is saying about itself Silence this week.. This week's grade for this parameter stays the same: 6 (6)

5. Steps B&N is takingNothing much here this week. This week's grade stays the same: 6 (6)6. CompetitorsThis parameter will mainly look into Borders and how its problems affect B&N.

This week Jeffrey Trachtenberg and Mike Spector reported on WSJ.com that "Borders Group Inc. hopes to exit bankruptcy-court protection by summer's end after getting a head-start on its restructuring by targeting 200 superstores for closure, Borders President Mike Edwards said in his first interview since the bookstore chain filed for Chapter 11 protection.

Borders is exploring closing as many as 75 additional stores and hopes to present a formal business plan to publishers and other creditors in early April. The ultimate goal: exit bankruptcy in August or September, ready to ramp up business for the key holiday selling season, Mr. Edwards said."

Nathan Bomey reminds us on AnnArbor.comthought these are not good news for B&N:

To make matters worse for Barnes & Noble, liquidation sales at the 200 superstores Borders is closing are performing very well, Borders executives have said. And analysts say that Borders liquidation sales — such as the one taking place at the Arborland Center store on Washtenaw Avenue — are undercutting Barnes & Noble's early-year sales.I don't think stronger Borders is necessarily bad news for B&N, but since the market since it is , this week's grade is going down in half point to: 5 (5.5)

8. Strength of the digital businessNo updates and this week's grade stays the same: 8 (8)

9.Sense of urgencyIt looks like B&N still think they have time and are not worried at all, or at least not worried enough to begin doing something (again, we don't believe more toys and extra room for the Nook is a winning strategy) with their brick and mortar stores. If we can learn something from the Borders' case, it's how fast things go bad when your reach a certain tipping point of financial distress or distrust of your stakeholders (consumers or publishers for example). This week's grade stays the same:5.5 (5.5)

10. General feeling This parameter will be an indication of our impression of all the materials read and analyzed for this index. Our feeling this week is that things are are looking not too good for B&N with the falling stock, no buyer at sight and no strategy for the brick and mortar stores. This week's grade is going down in half point to: 5.5 (6)

This week's Barnes & Noble Bankruptcy Index: 58.5 points (61)

As you can see, this week's index is set at 58.5 points, which means we moved into the scale of 50-59:Bankruptcy is a clear and present danger. It's still not the red zone but it means that bankruptcy is getting closer and is becoming a real threat to B&N. See you next Thursday.

No comments:

ebooks vs. paper books:

Eco-Libris: Plant a tree for every book you read!

Founded in 2007, Eco-Libris is a green company working to green up the book industry in the digital age by promoting the adoption of green practices in the book industry, balancing out books by planting trees, and helping to make e-reading greener.

To achieve these goals Eco-Libris is working with book readers, publishers, authors, bookstores and others in the book industry worldwide. So far Eco-Libris balanced out over 179,500 books, which results in more than 200,000 new trees planted with its planting partners in developing countries.